The hidden reality behind the rise of stablecoins in Latin America
Stablecoins – decentralized currencies pegged to the US dollar – are proving increasingly popular in Latin America, not only as a way to protect savings from local inflation and devaluation, but to purchase goods and services.
According to research from Chainalysis, stablecoins represent 61.8% of the crypto currencies traded in Argentina, for instance; significantly ahead of Ethereum (13.4%) and, even, Bitcoin (14.7%). The same is true across the region: in Colombia stablecoins account for 66.0% of trading activity, in Brazil it’s 59.8%, and in Mexico, 47.2%.
Stablecoins roll out across the region
This demand is being met (or driven) by local retailers increasing acceptance stablecoins as a form of payment; in May this year, Brale launched the MXNe, the first Mexican peso-backed stablecoin, particularly targeting the cross-border remittance market. Since August, Brazilian customers of Mercado Pago (a subsidiary of the Mercado Livre marketplace) have been able to buy and sell Meli Dollar – a stablecoin linked to the US$ – with their Brazilian Reais balances. In the same month, Ripio launched the Criptodólar stablecoin in Argentina, where locals had to cope with, not only spiraling inflation, but a notorious black market for currency exchange (where the official rate bears little resemblance to reality).
What is fueling the stablecoin demand?
Some explanations for the rise in stablecoin popularity focus around compliance issues and regulatory discrepancies between markets (in the case of cross-border transactions), settlement delays (in subsequent FX fluctuations) or, even, security across the array of intermediaries behind each payment.
However, such arguments miss two fundamental points. First, the above issues are what reputable, experienced PSPs (payment service providers) deal with and resolve every day. Whether around dealing with multiple regulatory jurisdictions or minimizing reconciliation times, these are precisely the challenges that reputable PSPs are addressing as part of their role. And there is plenty of evidence to suggest that the sector is successfully doing this; so, it would be difficult and incomplete to attribute stablecoins’ meteoric rise exclusively to such factors.
Secondly, the arguments miss the realities of the banking environment in Latin America, which – in many cases – are unique to the region. Traditional and notoriously conservative – 70% of banking activity in Brazil, Colombia and Mexico, for instance, is concentrated within each of the countries’ respective top 5 banks – the formal banking sector remains inaccessible and largely irrelevant to the majority of the population.
Banking fees across Latin America are the highest in the World. For example, credit card fees charged to consumers and merchants– the most important source of Latin American banks' payment revenues – amounted to over 1% of total fees, well above the 0.4% in Asia and 0.2% in Europe and some African countries.
Not only is the traditional banking sector in Latin America expensive, it is notoriously difficult to access. According to one piece of research on the ease of account opening in Brazil conducted by ID Wall prospective customers of one well-known bank must fill out 26 fields—which takes more than 15 minutes—to open an account. And that’s via its mobile app! If that wasn’t enough of a deterrent, it takes another 18 hours for the account to get approved!
And even with the arrival of traditional fintech alternatives is unlikely to change this reality. Latin American banks are doing just fine as things are. Mexican and Brazilian banks currently enjoy a return on equity of around 18%, almost five times that of French banks and twice that of American banks!
US$ for all
In such an environment, access to stability of the World’s reserve currency was limited to the chosen few who could afford to access traditional banking services. The emergence of stablecoins has – literally – democratized the dollar. Now potentially any citizen can exchange, transact, save and protect their wealth via US-linked stablecoins - in essence, all the benefits of the dollar without the transaction fees.
This shift has big implications for online retailers. We expect increasing preference for stablecoins as a means of payment – and, as our research confirms, 87.5% consumers consider their preferred payment option to be either ‘important’ (73.1%) or ‘fundamental’ (14.4%) to their purchase decision.
The challenge – and opportunity – facing retailers and the PSP partners will be to make the entire process as simple and intuitive as traditional FIAT payments have become. After all, to consumers in Latin America, stablecoins mean all the benefits of the US$ - including simplicity and ease of use.
About D24
D24 is a leading payment service provider that empowers companies in more than 27 countries across 3 continents to access comprehensive ‘deep payment’ processing solutions including cards and alternative payment methods. Securely adhering to strict industry governance, and providing access to more than 250 APIs via a single API for seamless integration, our customers benefit from efficient pay-ins and pay-outs with specialized solutions and payment gateways tailored to merchants’ individual local needs.
Disclaimer: D24’a cross border payment services are not applicable or available in the UK, US, nor further jurisdictions mentioned throughout this publication.
